Definition
Good Money in Banking
Good Money generally refers to federal funds that are available for use the same day they are deposited. This contrasts with clearinghouse funds, which can have a delayed clearing period. In banking:
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Federal Funds: These are deposits held at Federal Reserve Banks by commercial banks that can be used to meet overnight reserve requirements and to facilitate interbank transfers. They are considered “good the same day”.
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Clearinghouse Funds: Funds that usually take one or more days to clear through the banking system. These can involve a three-day clearing process or a one-day float period before the funds become available.
Good Money in Economics
In a more general sense, especially in economic theories, the term “Good Money” is discussed in relation to Gresham’s Law:
- Gresham’s Law: States that “bad money drives out good.” This theory suggests that currency with higher intrinsic value (good money) will be hoarded or removed from circulation when currency of lower intrinsic value (bad money) is also in use.
Examples
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Banking Context: A same-day wire transfer of federal funds is an example of good money because the recipient can use it immediately.
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Economic Context: Silver coins in a country where both silver and debased metal coins are in circulation would represent good money. According to Gresham’s Law, silver coins might be hoarded while lower-value metal coins remain in circulation.
Frequently Asked Questions (FAQs)
What is considered “good money” in the banking world?
Good money refers to federal funds that are immediately available for transactions within the same day of the deposit, unlike clearinghouse funds which take longer to process.
How does Gresham’s Law relate to good money?
Gresham’s Law suggests that when there are two forms of money in circulation, the money with higher intrinsic value (good money) will be hoarded and driven out of circulation by the money with lower intrinsic value (bad money).
What are federal funds?
Federal funds are deposits held by banks at Federal Reserve Banks that can be transferred to other banks or used to meet reserve requirements. These funds are available immediately.
What are clearinghouse funds?
Clearinghouse funds require one or more days to clear within the banking system, meaning there is a delay before the funds become available for use.
Why is there a delay with clearinghouse funds?
Clearinghouse funds take longer to process due to the need for verification and settlement between different banks, often involving a one-day float or a three-day clearing process.
- Federal Funds: Deposits that banks hold at Federal Reserve Banks, which are used for overnight loans between banks to meet reserve requirements.
- Clearinghouse Funds: Funds involved in transactions that require multiple days to clear through the banking system.
- Float: The time it takes for funds to become available after a deposit is made.
Online Resources
Suggested Books for Further Studies
- “Man, Economy, and State” by Murray Rothbard
- “Money Mischief: Episodes in Monetary History” by Milton Friedman
- “The Economics of Money, Banking, and Financial Markets” by Frederic Mishkin
Fundamentals of Good Money: Banking Basics Quiz
### What best describes "good money" in the context of banking?
- [ ] Money with unique design features.
- [x] Federal funds available the same day.
- [ ] Antique coins.
- [ ] Digital cryptocurrencies.
> **Explanation:** In banking, "good money" refers to federal funds that are available for use on the same day they are deposited.
### According to Gresham’s Law, what happens to good money?
- [ ] Good money circulates more.
- [x] Good money is hoarded and driven out of circulation.
- [ ] Good money increases in value faster.
- [ ] Good money replaces bad money in circulation.
> **Explanation:** Gresham’s Law states that "bad money drives out good," meaning people hoard currency of higher intrinsic value, removing it from circulation.
### What is the primary function of federal funds?
- [ ] To purchase consumer goods.
- [x] To meet overnight reserve requirements for banks.
- [ ] For personal savings and investments.
- [ ] To pay government taxes.
> **Explanation:** Federal funds are deposits held by banks at Federal Reserve Banks and are used primarily to meet overnight reserve requirements and facilitate interbank transfers.
### What causes the delay in clearinghouse funds?
- [ ] Currency conversion.
- [x] Verification and settlement process between banks.
- [ ] Fraud prevention measures.
- [ ] Transaction volume.
> **Explanation:** Clearinghouse funds involve a verification and settlement process between different banks, often causing a delay of one or more days before the funds become available.
### What term is used to describe the time it takes for funds to become available after a deposit is made?
- [ ] Lag
- [x] Float
- [ ] Delay
- [ ] Processing period
> **Explanation:** The term "float" refers to the time it takes for funds to become available after a deposit is made, during which the transaction is being processed and settled.
### How long typically does a clearinghouse fund take to clear?
- [ ] Same day.
- [ ] Two days.
- [x] Three days.
- [ ] Five days.
> **Explanation:** Clearinghouse funds usually take three days to clear, involving the verification and settlement process across banks.
### In which theory is the concept of "good money" crucial?
- [ ] Keynesian theory.
- [ ] Monetarist theory.
- [x] Gresham’s Law.
- [ ] Fisher Effect.
> **Explanation:** The concept of "good money" is crucial in Gresham's Law, which postulates that bad money drives out good money when both are in circulation.
### Which type of money would you expect to be kept out of circulation based on Gresham's Law?
- [x] High intrinsic value money.
- [ ] Low intrinsic value money.
- [ ] Digital currencies.
- [ ] Foreign currency.
> **Explanation:** Based on Gresham's Law, high intrinsic value money (good money) is expected to be kept out of circulation as people hoard it rather than spend it.
### What primarily differentiates federal funds from clearinghouse funds?
- [ ] Geographic origin.
- [ ] Interest rate.
- [x] Availability timing.
- [ ] Currency type.
> **Explanation:** The primary differentiation is the availability timing; federal funds are available the same day, whereas clearinghouse funds take several days to become available.
### What might be a reason for banks to use federal funds?
- [ ] To evade taxes.
- [ ] To invest in real estate.
- [x] To meet immediate reserve requirements.
- [ ] To pay dividends.
> **Explanation:** Banks use federal funds to meet immediate reserve requirements and to facilitate quick interbank lending, ensuring liquidity and compliance with regulatory requirements.
Thank you for exploring the concept of good money with us and delving into an enriching quiz experience! Keep staying informed and proficient in your banking and economic knowledge!
